Principal investigator: Angelo Cruz do Nascimento Varella
Article title: ENCOURAGING STATE GOVERNMENTS TO PROTECT AND RESTORE FORESTS USING ECOLOGICAL FISCAL TRANSFERS: INDIA'S TAX REVENUE DISTRIBUTION REFORM
Article authors: Jonah Busch and Anit Mukherjee
Location of the intervention: India
Sample size: Data on forest cover and tax transfers between 2011 and 2015
Main theme: Environment, Energy & Climate Change
Type of Intervention Forest preservation
Main Variable of Interest: Area covered by forests
Evaluation method: Others
Policy Problem
Preserving the environment and native ecosystems is a significant global challenge facing numerous complex obstacles. One of the main impediments to environmental conservation lies in the fact that commercial gains from the exploitation of natural resources are local and concentrated, in contrast to the losses resulting from these activities, which are widespread and decentralized. This creates a problem of economic incentives.
A widely used solution around the world is conditional payments related to activities aimed at preserving and restoring ecological ecosystems. In this way, financial rewards create new economic incentives and reduce or mitigate actions that harm the environment, in conjunction with other mechanisms such as monitoring and penalties for violations of environmental regulations.
In the case of forests, three types of conditional payments can be highlighted:
- Payment for Environmental Services (PES)
- Reducing emissions from deforestation and forest degradation, conserving forest carbon stocks, sustainable forest management and enhancing forest carbon stocks (REDD+)
- Green Fiscal Transfers (GFTs)
Assessment Context
Ecological Fiscal Transfers (EFTs) have several advantages over other conditional payment options linked to environmental preservation. Firstly, fiscal transfers are common and already operate in several countries and states. EFTs are easy to implement and allow for the decentralized and widespread reward or penalty of environmental conservation actions, ensuring that incentive funds are applied in the localities economically affected by the preservation choices. Furthermore, they can obviously be used in conjunction with other conditional payment options.
By 2014, countries such as Germany, Brazil, France, Poland, and Portugal had already implemented TFE (Transfer of Economic Activity) legislation for environmental preservation areas. Implementation initiatives also existed in India, Indonesia, and the European Union. However, India was the pioneering country to create a TFE system specifically for forests.
Policy Details
Implemented by the 14th Finance Committee in 2014, the Indian TFE program uses forest area to determine part of the annual tax redistribution rate from the central government to the country's 29 states. The following graph shows the evolution of the parameters that define this distribution, up to the implementation of the TFE rule based on forest preservation.
According to the decision of the 14th Financial Commission, between 2015 and 2019, 7,5% of the total taxes to be transferred by the central government to the Indian states (yellow area in the graph) will be linked to the total area of territory covered by forests. Data from the Central Government of India estimates that the amount allocated for this purpose will reach between 6,9 and 12 billion dollars annually. In fact, according to the Reserve Bank of India, in 2015, a total of 5,7 billion dollars – equivalent to 364 billion rupees – were effectively transferred proportionally to the respective forest cover.
It is worth highlighting that this amount characterizes Indian legislation as the largest forest-based reforestation tool on the planet. The overall objective of the Indian government with this measure is to increase the proportion of territory covered by forests from 24%, observed in 2013, to 33% of the country's total area.
Assessment Method
The data used in this study are derived from satellite imagery measuring the proportion of forest-covered areas and official data from the Indian government and its Ministry of Environment, Forests and Climate Change. It is important to note that this indicator does not distinguish between plantations or gardens and forests, which has generated some criticism from experts. However, the Indian government claims that the measure is beneficial to the environment and that extensive forest cover provides immense ecological benefits.
In order to investigate these claims and verify whether the implementation of tax incentives for preservation effectively helps to reduce deforestation and increase forest cover, the researchers used the collected databases to compare the evolution of these variables over time. It is important to note that this is a preliminary analysis, encompassing only the first two years of the law's application. The authors themselves emphasize that more time is needed to compare effects on reforestation conditions and changes in behavior on a national scale.
Results
After the introduction of TFEs, the devastation of dense or moderate forests was reduced by 51%, from 1.960 km².2 between 2011 and 2013 for 969 km2 Between 2013 and 2015. However, the authors emphasize that this result is not yet sufficient to carry out a complete analysis of the effects arising from the implementation of the new environmental legislation, mainly due to the lack of empirical evidence regarding reforestation rates. The authors state that, due to the short time between the creation of the law and the completion of the study, this result cannot yet be confirmed. However, the observed indications are encouraging.
Lessons in Public Policy
The analysis of the results stemming from the implementation of TFE for forest cover, up to the time of this study, has not presented robust results indicating improvements in the respective state indicators. However, the authors emphasize that this analysis is preliminary and presents encouraging indications pointing to an optimistic scenario regarding the objectives proposed by the law.
First, state governments demonstrated interest in tax incentives throughout the analysis period, especially due to the possibility of revising legislation for periods after 2019. Second, it is natural that adjustments to government planning take time to be effectively implemented, particularly regarding land use. Third, while a certain overall impact on reducing deforestation was observed, reforestation indicators are excessively porous, due to the need for tree growth to meet the relevant criteria.
The authors' conclusions also take into account potentially negative aspects. Firstly, despite being the largest TFE (Tax on Economic Development) on the planet to date, the annual transfer represents only 1,8% of total state revenues and may not be sufficient to shape political preferences. Secondly, the authors warn of the need to increase punitive measures for those who backtrack on environmental preservation. Finally, the researchers argue that it is necessary to pay attention to the fact that considering plantations as forest cover can generate inadequate incentives and cause states to carry out reforestation procedures without the necessary ecological requirements, generating a negative externality, such as planting commercially valuable trees instead of practicing reforestation recommended by experts.
Despite the warnings, the authors indicate the potential environmental and social benefits of the new legislation and state that further studies will be able to provide reliable answers.
Reference
BUSCH, Jonah; MUKHERJEE, Anit. Encouraging State Governments to protect and restore forests using ecological fiscal transfers: India's tax revenue distribution reform. Conservation Letters, vol. 11, no. 2, p. e12416, 2018.
